Furore over inheritance tax proposals brings election into focus

London Briefing/Chris Johns: August may be the traditional silly season whereby non-stories make for banner headlines, but it would be a mistake to dismiss the furore over an obscure think-tank's proposals for a reform of inheritance tax as just another example of late summer nuttiness.

The glee with which most of the media seized upon the report by the 'left leaning' Institute for Public Policy Research (IPPR) is indicative more of a desperate search by the Tories and their supporters for ideas that will finally resonate with the electorate.

No matter how much mud they throw at the government, none seems to stick; opinion polls continue to suggest that the Conservative Party remains unelectable, no matter how much people dislike New Labour.

The Conservatives have been keen to tell us that inheritance tax grips the imagination of the middle classes like no other issue and that any suggestions for an increase, hidden by the guise of reform, will prompt a collapse in support for the government.

We can almost hear the laughter coming from Downing Street as spokesmen struggle to keep a straight face as they tell us that the proposals will be studied seriously but no decisions have yet to be taken.

The core of the IPPR's report contained a recommendation that the current system of levying a 40 per cent tax on estates worth more than £263,000 (€389,778) should be replaced with a series of bands which would include a 50 per cent tax on estates valued at £763,000 or more.

Overall, it is forecast that the new scheme, if adopted, would modestly increase the total tax raised by a modest amount. And that total is already pretty small, at around £2.5 billion - the equivalent of around ½ penny on income tax. Some Tory-supporting newspapers have even suggested that "Labour's new tax plans" are a prelude to a new 50 per cent top rate of tax.

Now, if we know anything about Tony Blair it is that one his most formative political experiences was the loss of the 1993 general election as a direct result of Labour allowing itself to be seen as a party that would raise taxes. For as long as he remains prime minister he will never allow an overt rise in taxation to come anywhere near an election manifesto, let alone a policy (stealth taxes are a slightly different matter).

More importantly, the middle classes are only too aware of how to get around inheritance taxes. Indeed, there is a commonly held view that only a complete idiot ever ends up paying them. There are plenty of perfectly legal ways around the system, and one or two devices that may or may not stand up in court. Simply giving away your money, discretely or not, is a popular route, leaving the tax man the difficult job of investigating trails that have often long since cooled.

In the 1980s the term 'Sloane Ranger' was coined to describe the lifestyle of certain types of young Londoners. 'Hooray Henry' is another description from that era. While those phrases are less used today, it is instructive to hear the modern nickname that these same types have coined for themselves: 'Trustifarians'.

The use of various types of trusts means that there is a large cohort of people, again mostly to be found in London and the South East, who lead comfortable and inheritance tax free (and often employment free) lives thanks to money left to them via various legal wheezes dreamed up by accountants and lawyers.

The issue that critics of inheritance tax are trying to exploit is, of course, house prices. Because the value of many homes now exceeds the inheritance tax threshold, they are trying to create a climate of fear and persuade people that the government will force heirs to sell the family home. Simple tax planning can almost always avoid, or at least defer for a long time, this outcome and everyone knows this.

The Conservatives are clearly desperate and we can expect more of these tactics in the months ahead, particularly as speculation is surrounding early May as the date for the next general election. The possibility that the government will start paying out money in the form of 'baby bonds' (a device to encourage saving from an early age) just prior to that date has elicited similar fury, which is a bit rich since the Tories support the idea. The Conservative leader, Michael Howard, needs a big idea: attacking non-proposals is not one of them.